Is Uber Unconstitutional?

J. Gregory Sidak

Abstract

Uber’s online platform enables passengers to find drivers to arrange a ride. Uber has introduced a convenient and often cheaper alternative to the traditional taxi service. The traditional taxi industry has challenged Uber’s entrance into a market that previously had faced little competition due to regulatory barriers to entry. In the United States, the holder of a taxi medallion possesses the right to operate a taxi in the designated geographical area. Medallion holders have sued local regulators of taxi services, challenging their failure to impose on Uber obligations similar to those that taxis bear. Such lawsuits in Chicago and other cities have alleged that the regulator’s failure to require Uber drivers to obtain medallions violates the Takings Clause of the Fifth Amendment to the U.S. Constitution. The medallion holders argue that, by allowing Uber to offer de facto taxi services without medallions, local authorities have so impaired the medallion holders’ property as to cause a compensable taking of private property.

That conclusion is false as a matter of both economic analysis and constitutional law. As an economic matter, to establish a deregulatory taking, one must prove: (1) the existence of a regulatory contract, (2) the presence of investment-backed expectations based on irreversible investment, (3) the elimination of a regulatory barrier to entry, and (4) a decline in the regulated firm’s expected revenues. Because the provision of taxi service requires little if any irreversible investment, for this reason alone the deregulation of the taxi industry cannot be a deregulatory taking. For many years, medallion holders benefited from a regulatory barrier to entry in the taxi industry enforced by the limited number of issued medallions. But with a business model based on an entirely new technology, Uber upended that equilibrium. As Justice Pitney said in 1917, no one has the right to insist that a law shall remain unchanged for his benefit. The claim that the City of Chicago has violated the Takings Clause by permitting Uber to operate in competition with taxicabs is baseless.

The Uber litigation over taxi medallions reifies a rough justice in the Constitution’s treatment of rent seeking. On the one hand, the First Amendment’s right to petition government immunizes from antitrust liability a person’s sincere efforts to persuade the legislature to bar competitors from his market. On the other hand, if the statutory barrier to entry was never essential to eliciting the incumbent’s asset-specific investment to provide a public service by enabling the incumbent to recover its quasi-rents—that is, if the incumbent has reaped pure economic rent from a naked restraint of trade that legislators created at his (or his predecessor’s) behest—then the Takings Clause will not be read to entitle the incumbent to just compensation when a new technology evades that statutory barrier to entry and competes away the economic rent that it created for incumbents. To my knowledge, this symmetry between the First and Fifth Amendments is currently only implicit in the constitutional jurisprudence on rent seeking. The current Uber litigation will give the Seventh Circuit or the Supreme Court the opportunity to declare that symmetry explicitly.